Worried by the danger of bank runs cascading across the euro-zone periphery, and alert to Germany’s obvious unwillingness to underwrite some sort of blanket guarantee for the euro system, veteran City of London financier Martin Jacomb sketches out for the FT how a total break-up (a starburst, if you like, rather than a Grexit, say, or a split into Northern and Southern Euros) could be structured:
There must be no advance warning. Experience shows that currency break-ups, like devaluations, have to be handled so as to avoid anticipatory speculative activity. The essential requirement is a single, unequivocal decision to revert to national currencies, reached confidentially by all 17 governments and announced without prior notice.
The decision would be that all obligations and rights denominated in euros would be converted legally into rights and obligations denominated in new national currencies, with each euro henceforth to be divided into the 17 national currencies in the proportions in which member states hold capital in the ECB. All 17 governments would undertake to legislate to confirm this.
The conversion would apply not only to notes, bank deposits and loans, but also to bonds, including sovereign bonds, and to commercial contractual rights. There would be no difference between the worth of a euro deposit with a German bank and one with a Greek bank. Legal disputes about commercial obligations would mostly be avoided…
There would be a five-day bank holiday to enable foreign exchange markets to prepare.
Euro notes would continue to circulate until the new national currency notes were available. It would not be possible to unwind the euro notes while they were in circulation. But where quantities of notes are held, they could be deposited with a bank to effect the exchanges desired.
The advantage of the plan outlined above is certainty, combined with only limited dislocation. Although the new Deutschmark would be in demand and the new drachma would no doubt attract a discount, there is no reason to suppose that buyers or sellers would behave irrationally. Sensible values would quickly emerge; these currency variations are what is needed anyway in order to achieve competitiveness. Confidence would soon start to reappear.
Jacomb is not necessarily recommending this (and his last sentence is on the optimistic side), so this is as much an exercise in thinking aloud as anything else, but interesting . . .